Regional President Speech

HOSKINS, #17. AVOIDING MONETARY PROTECTIONISM: THE ROLE OF POLICY COORDINATION W. Lee Hoskins, President and Owen F. Humpage, Economic Advisor Federal Reserve Bank of Cleveland P.O. Box 6387 Cleveland, OH 44101, USA (216) 579-2111 (216) 579-2019 Presented at the Cato Institute's Eighth Annual Monetary Conference: "Global Monetary Order: 1992 and Beyond" London, England February 23, 1990. This paper will be published in the Cato Journal, Vol. 10, No. 2 (Fall 1990). We gratefully acknowledge the assistance of the staff, and the helpful criticism and comments on early drafts from James Cassing, David Fand, Steven Husted, Arthur Rolnick, and Alan Stockman. Opinions stated in this paper are our own and do not necessarily reflect those of the aforementioned individuals, of the Federal Reserve Bank of Cleveland, or of the Board of Governors of the Federal Reserve System. ^KANSAS 7 5 ^___u®»MHiB^ AVOIDING MONETARY PROTECTIONISM: THE ROLE OF POLICY COORDINATION Economists have long questioned the wisdom of attempting to achieve current-account objectives through a monetary manipulation of nominal exchange rates, and most have come to reject this practice as little more than a near-term palliative. Nevertheless, aiming monetary policies at nominal exchange-rate targets increasingly seems to be the approach of choice among national leaders. We refer to these attempts as monetary protectionism in order to emphasize their similarities to more traditional types of protectionist policies. As with calls for tariffs and quotas, calls for monetary protectionism do not stem from a clear, unequivocal demonstration of market failure, but rather from political institutions and incentives that encourage those dissatisfied with the market's outcome to seek market intervention. Proponents of monetary protection seek to supplant the automatic and nondiscriminatory responses of markets with the discretionary, politically motivated decisions of bureaucrats. Any international order built on such a foundation cannot raise world welfare. This paper will explore the political economy of monetary protectionism in order to illustrate its economic shortcomings and to understand its political appeal. As a counterweight to the political pull toward monetary protectionism, we recommend that nations adopt monetary constitutions that focus monetary policy on long-term price stability and that recognize market-determined exchange., rates. Moreover, we contend that international policy coordination set within this framework is both feasible and credible. 2 Monetary Protectionism By monetary protectionism, we refer to attempts to alter real exchange rates through a manipulation of monetary policy, with the hope of ultimately promoting a balance-of-payments objective. In the case of a deficit country, such as the United States in early 1985, monetary protectionists call for an expansion of money growth. A monetary expansion, other things being equal, will produce a nominal depreciation.1 If individuals are unable to adjust prices immediately, or if they are slow in perceiving the inflationary aspects of this policy, a real depreciation will accompany the nominal depreciation. As most economists realize, however, the inflation rate will eventually respond to the monetary expansion, offsetting the nominal depreciation and returning the real exchange rate to its initial position. Nevertheless, the tenuous, short-lived relationship between money and the real exchange rate is seductive enough to convince politicians and other "fine-tuners" that monetary policy can serve mercantilist designs. Our focus on this issue stems from a firm belief that central banks can do no better than to guarantee long-run price stability and that any efforts to limit this guarantee are not likely to raise welfare. This is the central lesson from the experience of policymaking during the 1970s, as well as the message of much of the professional literature based on models with ************* Monetary policy could play an important role in correcting a current-account deficit in an inflationary economy. The correct response, of course, would be a contractionary policy. 3 forward-looking, optimizing agents. Central banks can juggle a real exchange rate and inflation target no better than they can slide back and forth along a stable Phillips curve. A central bank that attempts to maintain price stability and a nominal exchange-rate target has more policy targets than policy instruments. At times, these two objectives might be compatible. For example, in the late 1970s, limiting the rapid dollar depreciation through intervention purchases of dollars could have been compatible with a contractionary monetary policy to eliminate inflation. As often as not, however, these two policy objectives will be incompatible, and the central bank must trade one objective against the other. Under such conditions, markets will view neither price stability nor exchange-rate stability as a credible policy. The knowledge that central banks will deviate from a policy of price stability to pursue an exchange-rate objective will raise uncertainty about real returns and will distort the allocation of resources across sectors and through time. The resources devoted to protecting wealth from possible inflation could be applied to more productive uses under a policy of price stability. Moreover, attempts to maintain nominal exchange rates will not eliminate exchange-rate uncertainty, since countries inevitably will resort to periodic exchange-rate realignments. Hedging exchange risk will remain an important aspect of international commerce. Although monetary protectionism seems most prevalent under the present system of floating exchange rates, one should not conclude that floating ■sV***^******* 2 We assume here that the world will not adopt a commodity (gold) standard, nor will all central banks steadfastly pursue price stability. 4 exchange rates promote its use. Monetary protectionism can result any time that a government lacks a strict monetary constitution and will accept nonmarket criteria for exchange rates. In principle, a gold standard or a fixed exchange-rate regime can limit the scope of monetary protectionism, because if all countries play by the rules of the game, they link money supplies closely to the flow of international reserves. In practice, however, such regimes do not destroy the political motives for monetary protectionism, and examples of monetary protection under fixed exchange rates abound. By allowing some discretion in the choice of exchange-rate pegs, and by permitting some inertia in nominal exchange-rate adjustments, fixed exchange-rate regimes often produce a mechanism that weakens the allocating efficiency of exchange markets and promotes mercantilist objectives. Economic Arguments for Monetary Protectionism Proponents of exchange-market intervention contend that the existing system of floating exchange rates lowers the potential gains from international commerce, because it has proven to be excessively volatile and because it has failed to promote adjustment_in the trade accounts. In their view, a global monetary system built on cooperative efforts among governments to manage exchange rates would enhance world welfare. Most economists recognize that one must base a legitimate case for government intervention on microeconomic evidence of market failure; that is, evidence of distortions and externalities, which prevent mutually beneficial trades from occurring. What, then, are the alleged market failures that underlie the interventionists' criticism of exchange markets? 5 Imperfect Information Prominent themes in the interventionist literature view exchange rates as excessively volatile, maintain that they overshoot their equilibrium values, and contend that they are subject to speculative runs. Interventionists view such tendencies as being synonymous with "market uncertainty" or "market disorder," generally implying that they result from imperfect information. Exchange markets, like other asset markets, are highly efficient processors of information. Forward-looking traders base spot and forward quotations on all relevant, available information. Upon the receipt of new, unanticipated information, traders revise their expectations and their exchange-rate quotations. The market pays substantial rewards for investments in knowledge, and provides few institutional constraints that restrict participation. At times, government authorities can possess better information than the market; for example, when they contemplate policy surprises. But, in nearly all cases, market participants and government bureaucrats receive and respond to the same information. Bureaucrats do not enjoy privileged insight. Moreover, the market will learn to anticipate the government's reaction to market developments, so that routine government interventions will not impart new information. These observations also suggest that unpredictable changes in government policies could be a prominent source of much of the observed exchange-rate volatility. All of this does not imply that exchange rates will remain stable. Indeed, nominal and real exchange rates have been substantially more volatile 6 since 1973, upon the demise of Bretton Woods. At question is the extent to which one should view volatility as necessarily reflecting market imperfections, which would require government intervention. Quite the contrary, as we discuss in the next section, movements in nominal exchange rates can be part of efficient adjustment in the terms of trade. Moreover, we lack convincing evidence that exchange-rate volatility is greater than that observed in other asset prices, or that exchange-rate volatility has reduced international trade or worldwide investment (see Bailey [1988]). The interventionists' characterization of exchange-rate overshooting and of speculative runs presumes that they know the equilibrium exchange-rate path. Theoretically, a sustainable equilibrium exchange-rate path is consistent with our concept of general equilibrium. Unfortunately, economists simply lack sufficient knowledge to specify accurately such an equilibrium path for a dynamic economy. Interventionists, therefore, designate equilibrium values in terms of a limited set of "fundamentals," which they hope will track the general-equilibrium path accurately enough that a policy of forcing market rates to this path will increase economic welfare. We are highly skeptical of such efforts. Volumes of econometric work have attempted to specify the relationship among sets of these fundamentals and exchange rates, with mostly unsatisfactory econometric results.^ Most often, analysts specify the equilibrium exchange-rate path in terms of purchasing-power parity. The problems associated with deriving purchasing­ power parity estimates of exchange rates are well known. Accuracy assumes that one chooses an equilibrium base period and that all subsequent shocks are ************* 3 The seminal study on this issue is Meese and Ro^off (1983). 7 monetary in nature. Because nonmonetary shocks can alter the equilibrium real exchange rate over time, the original purchasing-power parity estimate can drift away from the correct equilibrium exchange rate. Another common alternative is to define exchange-market equilibrium in terms of a "sustainable" current-account balance: one equal to "normal" capital flows. This approach relies on an estimation of a stable relationship between exchange rates and the current account after the statistician has removed the effects of business cycles, trade distortions, and other anomalies and temporary influences. Beyond the obvious technical problems, a strong economic rationale for such a stable relationship between exchange rates and the current account does not exist. As Stockman (August 1988, p. 535) notes: "...any pattern of correlations between the current account and the exchange rate can be obtained from theory, depending on the source of the disturbance and some characteristics of the model."^ In truth, governments have no better information about what constitutes the equilibrium exchange-rate path than do markets. Under these circumstances, attempts to force the exchange rate to a designated equilibrium are unlikely to enhance economic welfare. Sticky Prices and Wages Building on the idea that exchange rates should respond to trade flows, a second interventionist theme justifies active manipulation of exchange rates because prices (notably wages) are sticky (see Krugman [1989]). ************ 4 Stockman (October 1988) provides examples. 8 In this view, exchange-rate manipulation is seen as a means of fostering international adjustment when prices, most notably wages in the deficit country, are sticky. A real depreciation is particularly necessary, because strong propensities to spend in home markets weaken income-adjustment policies. With sticky prices, a nominal depreciation alters the terms of trade, offering a necessary incentive to switch the pattern of expenditures. The key here is an "active manipulation" of nominal exchange rates. Floating rates can indeed promote efficiency and aid in international adjustment, especially when prices are sticky. For example, an increase in foreign demand for U.S. goods produces a dollar appreciation, which dampens that demand. Otherwise, with home prices assumed sticky, we would require a non-price mechanism to accommodate the excess demand (see Stockman [October 1988, August 1988]). Such exchange-rate adjustments promote mutually beneficial trades and thereby enhance welfare. The activist view, however, rejects floating rates because they can permit large, persistent current-account deficits. Instead, this approach assumes that current-account deficits are disequilibrium responses to policy errors, which market imperfections aggravate. It characterizes the U.S. current-account deficit as abnormal from a historic perspective, and as unsustainable in view of some subjective calculations of our ability to finance this debt. According to this view, exchange markets apparently fail to consider these debt dynamics. Recent work questions this approach by suggesting that large current-account deficits can be an equilibrium attempt to smooth consumption over time in the face of shocks that temporarily reduce current output, or in the face of demographic factors that encourage current consumption relative to 9 future consumption (see Koenig [1989]). As Hill (1989) suggests, models that do not consider recent demographic patterns can produce misleading conclusions about the nature of the current-account deficit. Historic patterns, then, might not provide a basis against which to compare recent trends. Moreover, this recent work seems to question the validity of highly subjective calculations of our ability to finance that debt. We previously addressed a more important criticism of this "activist" view: Monetary-induced changes in nominal exchange rates will alter real rates only temporarily, to the extent that prices are slow to adjust. In the long term, monetary policy cannot alter the terms of trade. Exchange-Rate Indeterminacy Wallace (1979) offers a justification for exchange-rate management based on the argument that equilibrium exchange rates for fiat currencies are indeterminate; that is, many equilibrium exchange rates are possible. Governments can break the indeterminacy either by fixing exchange rates, by introducing legal restrictions on currency holdings, or by credibly threatening future exchange-market intervention. This theoretical model seems to suggest that all volatility is superfluous and unrelated to any economic fundamentals. As already noted, exchange-rate volatility that is related to fundamentals --changing supplies and demands--can promote the adjustment process. The model also assumes that fiat currencies are perfect substitutes, but individuals typically hold portfolios of interest-earning assets, not currencies. Evidence suggests that these assets are not perfect substitutes (see Hodrick [1987]). The associated risk will render exchange rates determinant. 10 Even if one accepts the indeterminacy argument, it does not justify the maintenance of fixed exchange rates through intervention in fiat currencies. Legal restrictions, such as a simple rule that governments collect all taxes and other payments in their own currencies, would suffice to solve the alleged problem. Policy Spillovers A recent justification for monetary protectionism stems not from market imperfections, but from alleged inefficiencies in government macroeconomic policymaking. Because a few, very large countries (the Group of Five) dominate international macroeconomic policy, the actions of any one have significant spillover effects on all other nations. Only through policy coordination can governments internalize these spillover effects, and achieve policy choices that are Pareto superior to autarkic policy setting. Many of the recent calls for monetary policy to focus on fixing exchange rates or on establishing target zones stem from policy coordination arguments. The elegant gleam of the theoretical argument for policy coordination becomes tarnished when exposed to empirical tests. Generally, studies do not offer support for international mechanisms, such as fixed exchange rates or target zones, that require a continual coordination of macroeconomic policies.^ Empirical studies of coordination find only small gains, suggesting that policy spillovers are not critical to the economic well-being of the largest industrial countries today. ************ 5 Humpage (1990) surveys this literature. 11 A major argument against policy coordination is that we lack sufficient knowledge about the nature of international economic interactions to agree on a specific model and on corrective policies. Nearly all econometric models differ in their policy multipliers. When these multipliers refer to domestic policy objectives, the differences are mainly in degree; but when the multipliers refer to international policy effects, the differences are often in direction. This uncertainty about the true economic model raises questions about the ability of policy coordination to enhance welfare. In large part, the lack of success in addressing current-account imbalances among West Germany, Japan, and the United States in recent years, has arisen because each country views the cause of the problem differently and, therefore, each has a separate prescription for redressing it. West Germany, for example, regards the current-account imbalances largely as a problem stemming from U.S. fiscal policies. Another questionable aspect of international policy coordination is that it can challenge the more traditional ordering of policy preferences, which is an important aspect of national sovereignty. West Germany, for example, traditionally has favored relatively low inflation and a current-account surplus, and is unlikely to accept a high rate of inflation in order to eliminate its current-account surplus. Countries will pursue international policy coordination only when it is mutually advantageous; they will abandon policy coordination if it conflicts with highly valued, traditional domestic goals. In view of the substantial weight countries attach to domestic policy targets, and given the apparent model uncertainty, policy coordination will lack the discipline and the spontaneity that it requires for credibility, much 12 less for success. An approach lacking credibility creates uncertainty about the reasons for government actions and could increase the volatility of asset prices, especially exchange rates. The Political Economy of Monetary Protectionism We have attempted to illustrate that the economic arguments offered in favor of monetary protectionism are weak; that such monetary manipulations do not have a permanent effect on the terms of trade, and that they risk causing inflation. To understand their proliferation, one must investigate the political institutions that give rise to monetary protectionism. In contrast to the interventionist literature, which presupposes an all-wise government acting in the public's best interest, a rich, growing literature on political economy characterizes elected officials as seeking to enhance their own power, prestige, and wealth by maximizing their ability to gain votes. Politicians and bureaucrats attempt to extend the scope of their political influence by responding to the demands of the most politically active (voting) constituencies. This literature has offered important insights into traditional protectionism (see Quibria [1989]). What follows are some thoughts on similar elements relating to monetary protectionism. Buying Time and Deferring Criticism By 1985, dollar exchange rates were at their zenith; the U.S. current account was deteriorating rapidly, and evidence suggested that the United States was becoming a debtor country for the first time since World War I. 13 U.S. manufacturers, facing increasingly stiff competition worldwide, besieged Congress for trade legislation. Most important, analysts increasingly linked the deterioration in the external accounts with fiscal policies of the administration and Congress. The opportunity cost of government inaction, measured in terms of votes lost, seemed to rise sharply in the early 1980s. The administration realized that the U.S. current-account deficit reflected imbalances between savings and investment in the United States, and in West Germany and Japan. Governments, however, cannot easily redress such structural relationships through fiscal policies because of strong vested interests in maintaining various tax and expenditure patterns. The unwillingness of the United States to take strong measures to cut the federal budget deficit typifies the problem. A corresponding reluctance to expand fiscal policy for balance-of-payments purposes existed in West Germany and Japan in the early 1980s. Lacking an ability to address these structural problems directly and quickly, policymakers might resort to exchange-market intervention. When coordinated through the Group of Seven, such intervention offers a highly visible signal that governments are addressing the requirements of their constituencies. If accompanied by credible pronouncements of changes in future monetary and fiscal policies, intervention might serve to diffuse criticism of administration policies, to blunt protectionist demands, and to buy time for more fundamental policy adjustments. Targeting Benefits, Diffusing Costs While goods prices are slow to adjust, a nominal currency depreciation is equivalent to a temporary, across-the-board tax on imports and a subsidy to 14 exports. With the terms of trade temporarily altered, certain groups in the traded-goods sectors can realize benefits from monetary protectionism similar to those afforded by commercial policies. Ultimately, any benefits from monetary protectionism dissipate with a higher inflation rate and with a reduced credibility of monetary policy. The inflation costs of monetary protectionism, however, are dispersed across a wider spectrum of individuals and over a longer time horizon than the benefits. A constituency that receives net benefits from monetary protectionism (export and import­ competing firms) can exist. Such a constituency is likely to be politically more cohesive than any constituency for price stability. Consequently, a policy that seems myopic from an economic perspective can be politically farsighted. Another seemingly attractive aspect of monetary protectionism is that Congress and the administration can justify it in terms of broader macroeconomic considerations, such as exchange-rate "misalignment" or current-account "imbalance," rather than industry-specific considerations, such as automobile and steel employment. Consequently, the rent-seeking aspects of monetary protectionism are less obvious than those of commercial policies. In the early 1980s, most import-competing firms sought direct restraints, because Congress can tailor commercial policies to fit specific products or countries. Direct restraints, however, seemed increasingly difficult for legislators to enact. As the frequently-heard plea "I'm for free trade as long as it's fair" suggests, even those who seek restraints recognize that as a general policy, protectionism is costly and inefficient. Perhaps more important, however, Congress faces a growing antiprotectionist 15 lobby (see Destler and Odell [1987]). Multinational firms and domestic exporters fear that U.S. trade sanctions could trigger foreign retaliation. Domestic importers of consumer goods and firms that use traded goods as component parts face higher costs because of import restraints. In addition, Congress is constrained in the use of traditional import restraints because such policies often violate existing treaties or tend to compromise other types of foreign-policy initiatives. Wary of the pitfalls of traditional commercial policies, some Congressmen sought to satisfy constituencies and avoid foreign retaliation through a manipulation of nominal exchange rates. By the end of 1985, many bills, introduced and supported on both sides of the aisle, contained specific endorsements of exchange-rate policy. One item, submitted by Senators Bradley, Moynihan, and Baucus, called for the creation of a "Strategic Capital Reserve," akin to the Exchange Stabilization Fund, which the Treasury would use to purchase foreign currencies when the current-account deficit exceeded a target value and when the dollar deviated from a level compatible with a current-account balance. The bill also instructed the Federal Reserve System not to sterilize the monetary effects of intervention from the Strategic Capital Reserve. The demands for protectionism seemed to lessen after the United States and the other large industrialized countries began to intervene and after the dollar began to depreciate. ************ 6 Destler and Henning (1989), pp. 108-112, discuss this legislation. 16 Government Collusion Countries interested in establishing exchange-rate targets have a strong incentive to collude in their efforts with foreign governments (see Vaubel [1986]). In the case where countries attempt to alter nominal exchange rates, such collusion provides tacit foreign approval of these policies and limits the chances that a foreign government will take steps to neutralize the exchange policies of another. Sometimes such collusion involves having cartel members delay policy negotiations or exchange-rate adjustments when individual cartel members face critical elections. Bretton Woods and the European Monetary System (EMS) are examples of fairly successful collusion. The competitive currency devaluations of the 1930s show what can happen when governments attempt to fix a price, but the cartel breaks down. Coordinated efforts to fix exchange rates can allow individual countries to influence the policies of others and to defer some of the adjustment burdens of maintaining the peg. Such mechanisms are found in the EMS and figure in some proposals for target zones and for fixed exchange rates. Many support the European Central Bank proposal for just this reason. The alternative is to sacrifice monetary sovereignty to maintain a fixed exchange rate and to follow the monetary policy of a dominant country. Rogoff (1985) presents another important reason that governments might collude to manipulate nominal exchange rates. In his model, governments have a higher tolerance for inflation than the public and attempt to exploit any short-term stickiness in prices for a higher rate of output and employment. Under floating exchange rates, a rapid depreciation in the nominal exchange rate in response to such inflationary policy signals the market's displeasure and constrains governments. Through collusion to fix the exchange rate, 17 however, governments can blunt the exchange-rate reaction to their policies and reduce the political costs of pursuing inflationary policies. Generalizing from Rogoff's argument, coordination to limit exchange-rate fluctuations is politically attractive because it eliminates an important, immediate barometer of the market's opinion of government policies. Extending Influence As in the United States, exchange-rate policy often falls under the purview of Treasuries and Finance Ministries, but its success requires the participation of central banks. As is well known, sterilized exchange-rate intervention has no lasting effects on exchange rates (see Humpage [1986]). For their part, central banks often are willing participants, viewing exchange-rate management as a legitimate aim of monetary policy. Exchange-rate movements can impart useful information for policymaking and, as already noted, exchange-rate targets can sometimes be consistent with a monetary policy of price stability. As often as not, however, exchange-rate policies conflict with price stability. For example, U.S. intervention sales of dollars this past year seemed inconsistent with a goal of price stability. When these objectives conflict, the Federal Reserve System faces a dilemma between its mandate of policy independence and its accountability to the broad national policy goals set by the Congress and administration. The System does not wish to appear unresponsive to the objectives of government before Congress and the administration or in the eyes of the public. Participation also enables a central bank to influence policy formulations that it is powerless to prevent. Nevertheless, as Herbert Stein recently noted, "Despite all the formal 18 provisions for its independence, the Fed seems constantly to feel that if it uses its independence too freely it will lose it." ^ In countries with independent central banks, intervention policies might enable fiscal agents to extend their influence beyond the exchange market to domestic monetary policy. Elected officials often seek easier monetary policy than central banks, hoping to lower interest rates and to stimulate real growth and employment. In choosing a nominal exchange-rate target, engaging in intervention, and encouraging the central bank not to sterilize the interventions, fiscal agents have a mechanism for such an influence. This channel of influence would not always be open. At times, however, such as when the central-bank policy committee is not in unanimous agreement, such an influence, marginal though it may be, could prove decisive in charting future monetary policy. A Global Monetary Order: 1992 and Beyond We have attempted to instill a healthy skepticism for exchange-market manipulation, arguing that monetary protectionism is not grounded in widely supported economic evidence of market failure and, therefore, that it is unlikely to enhance economic welfare. Instead, monetary protectionism stems, as a near-term palliative, from the political interactions between policymakers and constituencies with vested interests in particular market outcomes. Any international monetary order willing to accept nonmarket criteria for exchange rates and failing to bind governments with monetary ************ 7 "How to Worsen the Fed's Problem," Wall Street Journal, October 19, 1989. 19 constitutions is ripe for monetary protectionism. To counter the political incentives toward monetary protectionism, we urge nations to adopt monetary constitutions, along lines similar to the Neal Resolution in the United States, which focus monetary policy on achieving long-term price stability. This would do more for eliminating exchange-market uncertainty and for fostering the efficient worldwide use of real resources than any program to manipulate nominal exchange rates. Our comments are not meant as a blanket condemnation of international policy cooperation. We strongly support cooperation that emphasizes monetary constitutions, focusing on price stability, and that recognize market-determined exchange rates. Only cooperation based on these conditions seems both feasible and credible, because it recognizes the preeminence of national policy objectives and monetary sovereignty. Contrary to what some might infer, this approach does not preclude European monetary unification, but it suggests a different approach than currently seems to be favored (see Hoskins [1989]). European governments are not likely to relinquish national monetary sovereignty upon adoption of a single market in 1992. Indeed, this concern is at the heart of the British reluctance to join the EMS. Consequently, greater exchange-rate flexibility than the EMS currently provides seems necessary to ensure that exchange rates do not interfere with the efficient flow of goods, labor, and capital following the removal of restrictions. The free flow of resources will foster a convergence of policy preferences within Europe as governments compete for these resources by providing stable economic and political environments. Governments that fail to provide such an environment will lose resources, as markets "vote" on 20 policies. The resulting convergence of monetary and fiscal policies will lead to greater exchange-rate stability. In time, when the governmental competition for resources attains a convergence of macroeconomic policy, issues of national policy sovereignty, in effect, will be muted. Only then will a monetary union with a common currency be feasible, and only then will monetary union augment the efficiency gains of a single market. To fix exchange rates prior to a convergence of policy preferences within the Economic Community seems to ensure that interest rates and prices will bear more of the adjustment burden as resources move across currencies. Moreover, judging from the experience of Bretton Woods, fixed exchange rates would seem to guarantee speculators of periodic and obvious exchange-rate adjustment and to encourage governments to impede the flow of goods and capital through the reintroduction of restraints. The dynamics of achieving monetary union are as important as the goal. 21 References Bailey, Martin J. and George S. Tavias. "Trade and Investment under Floating Rates: The U.S. Experience," Cato Journal, Vol. 8, No. 2, (Fall 1988) pp. 421-42. Destier, I.M. and C. Randall Henning. Dollar Politics: Exchange Rate Policymaking in the United States (Washington,D.C.: Institute For International Economics), 1989. Destler, I.M. and John S. Odell. Anti-protectionism: Changing Forces in United States Trade Politics (Washington, D.C.: Institute For International Economics), 1987. Hill, John K. "Demographics and the Trade Balance," Federal Reserve Bank of Dallas, Economic Review (September 1989), pp.1-11. Hodrick, Robert J. The Empirical Evidence on the Efficiency of Forward and Futures Foreign Exchange Markets (London: Harwood Academic Publishers), 1987. Hoskins, W. Lee. "A Market-Based View of European Monetary Union," Federal Reserve Bank of Cleveland, Economic Commentary, April 1, 1989. Humpage, Owen F. "A Hitchhiker's Guide to International Macroeconomic Policy Coordination," Federal Reserve Bank of Cleveland, Economic Review, (forthcoming) Quarter 1, 1990. ______________• "Exchange-Market Intervention: The Channels of Influence," Federal Reserve Bank of Cleveland, Economic Review. Quarter 3 1986 pp. 2-13. Koenig, Evan F. "Recent Trade and Exchange Rate Movements: Possible Explanations," Federal Reserve Bank of Dallas, Economic Review (September 1989), pp. 13-28. Krugman, Paul. Exchange-Rate Instability (Cambridge, Mass.: MIT Press), 1989. Meese, Richard and Kenneth Rogoff. "Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?" Journal of International Economics, Vol. 14, No. 1/2 (January 1983), pp. 3-24. Quibria, M.G. "Neoclassical Political Economy: An Application To Trade Policies," Journal of Economic Surveys, Vol. 3, No. 2, (1989) pp 107-36. Rogoff, Kenneth. "Can International Monetary Policy Cooperation Be Counterproductive?" Journal of International Economics, Vol. 18, (May 1985), pp. 199-217. 22 Stockman, Alan C. "Exchange Rates, the Current Account, and Monetary Policy," processed draft written for the American Enterprise Institute Monetary Policy Project, October 1988. --- . • "On the Roles of International Financial Markets and Their Relevance for Economic Policy," Journal of Money, Credit and Banking. Vol. 2, No.3, Part 2 (August 1988), pp. 531-549. Vaubel, Roland. "A Public Choice Approach to International Organization," Public Choice, vol. 51, No.l (1986), pp. 39-57. Wallace, Neil. "Why Markets in Foreign Exchange Are Different from Other Markets," Federal Reserve Bank of Minneapolis, Quarterly Review (Fall 1979), pp. 1-7.

W. Lee Hoskins (1990, February 22). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19900223_w_lee_hoskins

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  author = {W. Lee Hoskins},
  title = {Regional President Speech},
  year = {1990},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19900223_w_lee_hoskins},
  note = {Retrieved via When the Fed Speaks corpus}
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